As a practical matter if I really wanted to target 2014 I might go with the 2015 fund because the 2014 fund starts liquidating due to maturation as soon as January 15, 2014. I would also add that buying individual issues that are investment grade is not terribly difficult beyond trying to minimize the chance that something you buy today isn't going to get called tomorrow. And as a more general warning the fixed income ETF space is evolving such that the ETFs can be more liquid than what they own which can cause the market value to stray from the fund's IIV (IIV is the ETF equivalent of NAV).
The reason to mention BulletShares at all is they are now coming out with junk bond funds with the same sort of maturity structure as the existing funds. I received a couple of emails on these that gave the impression that they would be out yesterday but I don't think that was the case (no info on the Guggenheim website and neither Yahoo Finance or Google Finance recognized them).Per the emails there will be four junk bond ETFs. The fund targeting 2012 will have ticker BSJC, 2013 will be BSJD, 2014 will be BSJE and 2015 will be BSJF. The site for the index provider has information for underlying indexes going out every year until 2021 so perhaps there will be more funds later. To be clear, the point of this post is not that you should run out and buy a junk bond ETF right away, Jeffrey Gundlach thinks now is a bad time for this space, but to point out the space is evolving for the better.
The BulletShares concept, despite not getting a lot of attention, is actually one of the more important developments with bond ETFs, in my opinion. The bond market has been distorted by a combo of desperate policy and the fundamental risk currently embedded in the US economy and while I think the best way to navigate this problem is with a healthy dose of individual issues not everyone is comfortable with this which is where funds can obviously come in.
We see precision with some funds in some segments like lately with the TIPS space but with other segments the maturities are a range of years but it is the same number of years perpetually targeted. For example a 7-10 year treasury ETF will always target 7-10 years so if somehow the yield on a 7 year treasury was 6% today buying that ETF would not lock in that 6%. If one year later a seven year treasury is yielding 2% then the fund you bought will be yielding something close to 2%. The bullet share structure goes a long to minimizing that effect but, big but, if the 2016 fund yields 6% today but a bunch of cash comes in six months from now requiring the purchase of more bonds then the difference in rates six months from now could be significant enough to change your yield. I believe this is still a better way to go fund-wise but not perfect.
4 comments:
One of my indicator on the weekend gave me a Top signal. This indicator gave the same signal in 2005 in 11/2007 and in 6/2008. So we are in toppy situation. I am concentrating in Italian market - Banks that last week hit an absolute low. So today like isp.mi and bp.mi are doing well. The Italian market is a trading mkt and not an ivestment type.
Best,
Jeff from Milan, Italy
I feel I know more about investing and economics than the average person (from speaking to hundreds/possibly thousands of retail customers about their financial situations) and could tell a high-risk growth stock from a high-yielding mature company stock from several miles off, and I have done an acceptable job of advising friends and family on their investment priorities and risk profiles WRT looking at stock markets or not. But I didn't understand a single word of your piece today, Roger, just as I never understand any articles on bonds. They might as well all be written in Greek.
A junk bond ETF, to me, sounds like a short-cut to living on dog food and applying for second, third and fourth jobs. Obviously this is incorrect or it would not merit serious consideration from good folks such as yourself. As anything which I don't understand in the investor-sphere I'm intrigued and slightly anxious to lose some money on this vehicle, which is how I usually start out with a different equity. This, I find, concentrates the mind somewhat and enables me to give suitable precautionary tales to said friends and family. Fortunately I make less mistakes as I go on but, in this case, I'd prefer to start out without making (or realising, to be more precise) a loss and improve therein.
I see two ways of doing this; ignore the enticingly-named ETF for all of eternity or .... that's where I get stuck. And I have cash in an investing account that's earning a big fat zero return and is not sufficiently large enough that a total loss would inflict serious long-term damage. If it was in my pocket it would be said to be burning a hole. Not a good situation, or at least a situation I've found myself in before and proceeded to realise a negative return in the process, so not good for me.
So, to summarise, my appetite is whetted. Where do I go from here?
Anon 11:04. For what its worth, and speaking only for myself, I consider high-yield bonds/funds to be high-yield stock. They go up and they go down, and I do own some for the income they generate. Also, for what its worth and with gov't/corporate investment grade interest rates as low as they are, I consider them to be safer (meaning less interest rate risk) then other bonds.
Anon 4:35 thanks for your reply.
So you view this as a high-yielding stock and consider it safer than low yielding bonds?
Ha ha, I'm completely at a loss as to how that works so, WRT bond funds, I will have to pass. On second thoughts I think I have a couple of funds which are already bond-heavy - my two Absolute Return Funds. Yes, they are doing the job that I chose them for; to balance my risk. So I think my interest is satiated in the bond markets. Thank you again for your reply.
Post a Comment